Mortgage Approvals in Canada
Understanding the mortgage approval process in Canada is crucial, whether you’re buying a new home, refinancing an existing one, or considering a switching lenders. This process, which assesses your financial readiness for a mortgage, involves several important steps. In this overview, we aim to demystify this process, providing you with a clear understanding of what it entails. Let’s explore the details and make your journey through the mortgage approval process smoother and more manageable.”
The Mortgage Approval Process
Step 1: Application
The first step in the mortgage approval process is to complete an application with a broker or a lender. This application will ask for information about the property you wish to mortgage, your income, debts, assets, and your credit history. Whether you’re buying, refinancing, or switching, you’ll need to provide this information.
Step 2: Documentation
You’ll need to provide several documents to your broker or lender, including proof of income (like pay stubs, tax returns, etc.), bank statements, and information about any debts you have. You’ll also need to provide details about the property you’re buying, or if you’re refinancing or switching, information about your current home and the existing mortgage on it.
Step 3: Assessment
First the broker, and then the lender will assess your application, taking into account your income, your debts, your credit score, and the value of the property you’re financing. In case of buying, they’ll also consider the size of the down payment you’re able to make. If you’re refinancing or switching, they’ll look at your home’s current value and your remaining mortgage balance.
Step 4: Approval
If the lender is satisfied with all the information provided and you meet their lending criteria, you’ll be approved for the mortgage. The lender will then provide you with a ‘commitment letter’ detailing the terms of your mortgage. This letter is important because it lays out the terms of your loan, including the interest rate, monthly payment, any closing costs and other important details. There are also legal expenses that are part of the closing costs, separate from the lender’s costs. Your broker and your lawyer, if one is needed, will be able to advise you on the estimated costs.
Factors That Affect Mortgage Approval
Several factors can affect whether or not you’re approved for a mortgage:
- Credit History: A high credit score and overall good credit report, supported by a history of on-time payments, indicate that you’re a low-risk borrower, which can increase your chances of approval.
- Debt Service Ratios: There are two ratio that are commonly used, the Gross Debt Service Ratio (GDS), and Total Debt Service Ratio (TDS). These ratio takes into account your mortgage principal and interest, along with your taxes and heating expenses, and condo fees if applicable, as well as your other payments, divided by your annual income. As a rule of thumb for mortgage qualification, your GDS ratio should not exceed 39%, and the TDS shouldn’t be higher than 44%. The higher these ratio are, the higher the risk of taking on more debt than you can afford.
- Employment and Income History: Lenders prefer borrowers who have a stable employment history.
- Down Payment or Remaining Equity: The larger your down payment or the remaining equity in the property, the less you need to borrow, which can increase your chances of approval.
The Role of Mortgage Brokers
Mortgage brokers play a crucial role in the mortgage process. They work with multiple lenders to find you the favourable mortgage rates and terms. They can save you time and effort by doing the shopping around for you. More and more Canadians are using mortgage brokers for their home financing needs instead of just going to their own bank. This is because brokers have access to a wide range of mortgage products from various lenders, including those that you might not find on your own.
The mortgage approval process may seem daunting, but understanding how it works can make it less intimidating. Remember, every lender is different, so it’s important to speak with a qualified mortgage professional that can shop around and find the best mortgage product for your needs. And always make sure you understand all the terms and conditions before signing on the dotted line.
As you embark on your mortgage journey, remember that knowledge is your greatest ally. If you have questions or need guidance, we’re here for you. Feel free to share this information with friends and family to empower them on their financial paths as well. Happy mortgage hunting!